The economy of the 00s was built on millions of personal Ponzi schemes. The residual debt from their collapse weakens the recovery. Many people fail to budget properly for unexpected expenses or expenses that do not occur monthly. When these expenses occur, most will borrow the money, often on credit cards; this debt accumulates like tooth plaque, and at the end of the year, many debtors hope for a work bonus or a tax refund to scrape the debt from the family balance sheet. Homeowners, particularly in California, utilize the housing ATM and add to their mortgage to pay for these un-budgeted expenses of daily life. The sad reality is that this method of Ponzi borrowing can work as long as (1) the amounts added to the home mortgage are…[READ MORE]

Instead of encouraging home ownership as the best means of acquiring wealth, perhaps government policy should encourage saving and investment among renters. In a recent post I noted that Renters can acquire wealth as well as homeowners. And while renters can acquire wealth, the system of tax incentives and government policies doesn't make it easy. Perhaps now that the idea that real-estate-always-goes-up is exposed as a dangerous illusion, the family home can no longer be relied upon to anchor the middle class's retirement and wealth-building plans. The middle class learned painfully the folly of putting their entire nest-egg in the wrong basket. Government policy strongly favors home ownership mostly because politicians embraced the same delusions as everyone else concerning wealth-building…[READ MORE]

Lenders, the government, and the federal reserve reflated the old housing bubble and priced out the buyers homebuilders counted on for sales growth. Be careful what you ask for because you might get it. Everyone who makes a living in real estate wanted to see the end of the price decline and a rapid price increase to reflate the housing bubble. The conventional wisdom was that increasing prices would create a virtuous circle where both sales volumes and prices would keep rising simply because they already were rising: the delusion of escape velocity. In the past markets achieved escape velocity because lenders extended toxic financing terms to lower and lower quality borrowers to keep the party going, but the new…[READ MORE]

Is a house worth whatever a buyer and seller agree upon, or do appraisers have a responsibility to kill deals when the number is too high? When a buyer is paying cash, and the seller agrees to the offer, these two parties alone establish value, so under those circumstances, whatever a buyer and seller agree upon does establish value; however, when the buyer is borrowing 80% or more of the agreed price from a third party, and often buying mortgage insurance from yet another party, then the parties providing the money and the insurance have a strong interest in verifying the property could be sold to someone else at a similar price. Appraisers verify values based on comparable sales to…[READ MORE]

Everyone in the real estate industry is hopeful for a better 2015. Financial media panders to this hope with stories of looser credit standards. I used to believe journalists attempt to convey facts and truth, come what may; however, after reading housing reports in the financial media over the last eight years, I conclude the financial media views their work as emotional therapy for people with a financial interest in real estate -- truth is secondary to the primary task of providing hope and comfort. I can understand the desire: When times are tough, false hope is better than no hope at all. Seven years ago, I told people house prices would collapse, Ponzi borrowers and workers in the real…[READ MORE]

When a HELOC recasts to a higher payment, borrowers default at rates four times larger than normal. The housing market bottom of 2012 was engineered by policy at the major banks. Millions of borrowers stopped making payments, and rather than foreclose on them, lenders decided to modify loans and get whatever payments they could from borrowers and wait until house prices recovered. Since the alternative for lenders was insolvency, they didn't have much choice; can-kicking became the policy of necessity. Politicians eagerly embraced lender can-kicking, and some legislatures mandated it. Borrowers desperately pleaded for can-kicking, and lenders needed to comply for survival, which is why it really happened. If lenders had foreclosed on all the delinquent mortgage squatters and liquidated…[READ MORE]